The Psychological Factor in Scalping the FX Markets

Forex Scalping

Scalping has been a popular trading strategy amongst forex traders for many years. Traders aim to profit anywhere between 5 pips to 15 pips using short time frames such as the 5 minutes chart and 15 minutes chart through a number of traders that may eventually accumulate to a large number of pips. Scalping strategies require a relatively tight spread, which makes Euro Dollar the most desired pair scalping.

The best market conditions for scalping are ranging markets where the price is held in a tight range. This allows scalpers to execute short trades at the upper range (resistance) and long trades at the bottom (support).

The longer the price remains in the range the more opportunities may be seen until a firm breakout takes place. On a psychological level, many scalpers are unable to hold onto a trade for several days and watch the profits/losses fluctuate.

If the position is in a loss of -40 pips, as soon as it turns into a profit of a number of pips the scalper immediately closes the trade, some times on fear the market may reverse its trend. The vast majority of the forex signal providers industry that is based on social trading favour scalpers as opposed to swing trading due as the platform that enables the mirror or trade copier enjoys a commission from the spread as well as the scalper.

The logic behind scalping is that it is ‘easier’ to profit 50 pips in multiple trades rather than holding a single trade and suffering from the market fluctuations. To ensure it is rewarding, scalpers often execute trades between 100,000 units (1 standard lot in the MT4) and 1,000,000 (10 standard lots in the MT4). The leverage is often kept low although some traders may be more ‘adventurous’ in their trading style.

Forex Scalping Trading Psychology

The most difficult part of scalping is exiting the trade with a loss. As multiple trades are taken on a daily basis, the trader will witness the market triggering his or her stops and then reversing in the predicted direction. The trader must have the psychological strength to withstand such horrific scenes but unfortunately many do not possess that mental ability.

Many forex scalpers do not use stops and exit the trade as they please. Once the trade begins to underperform they convince themselves the market is due to flip over, risking heavier losses. Ultimately, there will be a point the trader realizes there is no escape from exiting the trade with a loss.

Scalping is not suitable for all traders as it greatly depends if you have the psychological factor the strategy requires. If you are considering to scalp in the market we suggest using the 5min, 15min and the 60min chart. If you do not wish to use stop loss orders we presented other methods of managing risk in the market such as double day stop or via the margin.

The double day close may be used on shorter time frames such as a double close below or above the intraday support or resistance level.

There are many technical indicators that were developed for scalping forex. We find the standard support and resistance levels combined with classic reversal patterns to be the most effective but you may explore various indicators that may suit your needs. Please note that High Frequency Trading (HFT) and scalping in stocks are completely different to scalping in the Foreign Exchange market.

In Digital Derivatives Markets (DDMarkets) we prefer exercising our forex trade alerts on the daily, weekly and monthly chart. It relieves us from the intraday pressure and the intraday noise, targeting only the medium term trend. We use stop loss orders for all our trades and strive to maintain a low market exposure at any given time. You may review our detailed trades performance for more details.

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